HONG KONG, August 21, 2026, 07:20 HKT — Hong Kong equities start trading at 09:30 HKT while U.S. markets remain shut.
- Alibaba’s AI Labs reported a loss amounting to 2.5 times the adjusted EBITA of AI Cloud.
- Cloud revenue increased by 45%, and quarterly capital expenditures surged 75%.
- BABA recovered from initial post-earnings losses to finish regular U.S. trading up roughly 1.3%.
Alibaba Group Holding Limited (NYSE:BABA; HKG:9988) provided its strongest signal so far that its AI infrastructure is profitable. AI Cloud adjusted EBITA surged to RMB5.63 billion in the June quarter, more than doubling from the previous period. However, the AI Labs and Applications segment posted a loss of RMB13.86 billion, which was 2.46 times greater than the profit from the cloud unit.
The split carries greater significance than the headline decline in profits. It indicates that commercial AI demand is advancing more quickly than overall group earnings, while also highlighting the expenses involved in model development and consumer applications.
| Group metric | June 2026 quarter | June 2025 quarter | Change |
|---|---|---|---|
| Revenue | RMB268.95bn | RMB247.65bn | up 9% |
| Operating income | RMB15.16bn | RMB35.93bn | down 57% |
| Net income | RMB10.44bn | RMB42.38bn | down 75% |
| Free cash flow | -RMB44.67bn | -RMB18.82bn | Outflow increased by RMB25.86bn |
Revenue increased by 9% to reach RMB268.95 billion. Net income decreased 75% to RMB10.44 billion. The drop in profit was driven by reduced operating income and lower investment returns. Capital expenditure impacted cash flow independently, resulting in a free cash flow outflow of RMB44.67 billion.
Cloud economics saw rapid improvement. Revenue climbed 45% to RMB48.44 billion. Adjusted EBITA jumped 133%, with its margin rising to about 12% from 7%. Chief Financial Officer Toby Xu said this outcome allowed Alibaba “disciplined and sustained investment in AI.” Alibaba investor-relations release
| Operating unit | Revenue | Revenue growth | Adjusted EBITA |
|---|---|---|---|
| AI Cloud and Compute | RMB48.44bn | up 45% | RMB5.63bn |
| AI Labs and Applications | RMB3.34bn | up 16% | -RMB13.86bn |
| China E-commerce | RMB205.86bn | up 4% | RMB39.75bn |
AI-driven product revenue totaled RMB12.38 billion, representing approximately 26% of AI Cloud sales. Management reported that this segment achieved triple-digit growth for the twelfth consecutive quarter.
The more challenging trial is located beneath the segment line. AI Labs posted a 330% increase in losses as Alibaba invested in developing frontier models and Qwen inference. Chief Executive Eddie Wu stated that monetisation efforts are still falling short. Wu anticipates increased returns when proprietary T-Head chips are used instead of commercial chips in data centres.
| AI investment gauge | Latest value | Investor reading |
|---|---|---|
| Quarterly capex | RMB67.68bn | Up 75% from a year earlier |
| AI/cloud three-year budget | RMB380bn | 17.8% of this allocated in the quarter |
| Total spend by June | About RMB190bn | Nearly half allocated |
| Payback target for management | Within three years | Relies on current average gross margin levels |
Capital spending increased by RMB29.00 billion compared to the previous year, outpacing the RMB25.86 billion decline in free cash flow. Reuters reported that by June, Alibaba had used almost half of its RMB380 billion investment plan. Management anticipates that capital investments tied to AI will reach break-even within three years.
The stock reversed course as investors separated cloud momentum from spending concerns. BABA dipped at the open but closed regular New York trade about 1.3% higher. Shares stood around $130.20 after hours at 18:59 EDT, approximately 5% above its August 14 finish.
| Analyst | Firm | Rating | Target | Date |
|---|---|---|---|---|
| Joyce Ju | Bank of America Securities | Buy | $172 | Aug. 20, 2026 |
| Jiong Shao | Barclays | Buy | $195 | July 14, 2026 |
| Robin Zhu | Bernstein | Buy | $180 | July 13, 2026 |
| Gary Yu | Morgan Stanley | Overweight | $180 | July 8, 2026 |
| Alicia Yap | Citi | Buy | $192 | July 8, 2026 |
Analysts generally maintain a positive outlook, though their forecasts are now tested by cash generation. Gary Yu of Morgan Stanley had projected 45% growth in cloud and roughly an 11% margin ahead of the results. Alibaba matched these figures. Uncertainty remains over the pace at which AI Labs can reduce its losses.
Risks: Reduced economic momentum in China may impact cash flows from trade. An increase in chip costs could result in sustained high levels of capital expenditure. Technology restrictions between the U.S. and China might further restrict the availability of advanced hardware.
The upcoming week opens with focus on Hong Kong’s response to the U.S. reversal. Investors are monitoring trends in cloud bookings, Qwen inference expenses, and indications of larger buybacks. The primary benchmark is clear: AI Cloud’s profits need to start closing the gap with AI Labs’ losses.
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